Pillage: a new threat to global supply chains
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This paper explores the business
risk of association with economic
war crimes as supply chains
lengthen and activist interest
grows.
Shifting regulatory, jurisprudential
and public opinion landscapes
have revitalised the war crime of
pillage as an offence, and business
must respond.
We support our 162,000 members and 428,000
students in 173 countries, helping them to develop
successful careers in accounting and business, with the
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© The Association of Chartered Certified Accountants
June
2
2014
FOR MORE INFORMATION CONTACT
Jason Piper
Technical Manager, Tax and Business Law
[email protected]
Executive summary
The war crime of pillage poses a
multilayered threat to multinational
business. Its interaction with money
laundering offences extends the risk
from direct involvement to guilt by
association. Prosecution for pillage can
attach to individuals or, where
jurisprudence permits, companies.
Proceedings can be instituted in any
jurisdiction where the entity or
individuals are resident (regardless of
where the offence took place), and
some legal systems will entertain an
indictment even of foreign residents –
the nature of the crime is so
extraordinary that prevention and
punishment justify prosecution
regardless of nexus.
Although there are limits to the
prosecution of corporate entities for
pillage itself, its incorporation within the
canon of offences predicate to money
laundering magnifies the risks to a
modern business. Even where the
evidence does not support a direct
conviction for pillage, and where
corporate liability for pillage is
definitively precluded, businesses can
be open to prosecution for money
laundering if pillaged goods are found
in their supply chain.
As supply chains lengthen, the risk
increases of receiving goods into the
business that are ‘tainted’ by pillage.
Though the precise formulations vary, it
is quite possible for a business to be
indicted despite a lack of clear intention
or specific knowledge of the nature of the
goods received. In some jurisdictions
even genuine ignorance on the part of
senior management will not be a
defence and ‘turning a blind eye’ (‘wilful
blindness’ in the US) can also be grounds
for prosecution. The mere existence of
evidence that might imply unlawful
sourcing of the goods can be enough
to support prosecution and conviction.
Management should be prepared to
manage that threat – by controls and
assurance. From a long-term financial
perspective, the only real defence
against the possible impacts that
handling pillage could have on a
business will be the ability to refute
absolutely any allegation of involvement
in or connection with pillaged goods in
the supply chain. While a conviction of
either the business or its employees
may well be fatal to the continued
economic survival of the business,
financial systems and reporting
structures should be designed not just
to control economic profit but also to
identify and control risks in the supply
chain. The proper design,
implementation and operation of due
diligence procedures will be an
essential element of the well-managed
business, quite apart from the looming
threat of their imposition through
regulation.
PILLAGE: A NEW THREAT TO GLOBAL SUPPLY CHAINS
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1. Why is pillage a risk issue for business?
The war crime of pillage has been
subject to renewed interest in academic
circles, with the emergence at the end
of the 20th century of the phenomenon
of the resource war. If war in the 19 th
century could be characterised as the
continuation of politics by another
means, so a new spectre has arisen of
war as the continuation of economics by
other means.
To what extent is the risk of prosecution
for, or association with, pillage a real
one for businesses outside any
warzone? If the risk is real, what
measures can or should be taken to
protect against it? And to what extent
can such measures align with existing or
impending regulatory requirements, or
even improved business processes?
The benefits of extensive resource
networks, and the related length of
supply chains, are well recognised. The
ability of business to offer finely
differentiated end products to different
markets and consumers while still
realising the advantages offered by
economies of scale is a key feature of
the favoured model of transnational
corporations.
Examples of global brands reliant upon
these structures can be found in every
major city and airport on the planet, in
both service and retail goods sectors.
The rise of online selling across borders
has expanded markets still further, and
raised the potential rewards for
manufacturers who can meet every
variant of demand for their products,
hand in hand, of course, with a wider
presence and wider exposure for the
business through the World Wide Web.
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Nonetheless, the risk of opacity is
inherent in the length and complexity of
the supply chains that make up the
substance of modern trade and
production. At every link in the chain,
participants are dependent on trust in
their business partner that their
supplies have all the desired
characteristics, but no negative ones.
Perhaps one of the most commercially
damaging associations a business could
have today is with war crimes. In
addition to the direct legal
consequences of a conviction for
involvement in war crimes, public
revulsion in many markets is likely to
have a significant impact on public
perception and demand for the
business’s products.
From a societal perspective, this
extension of the possible scope of the
ramifications of war crimes is a good
thing, as it increases the likelihood that
those responsible for such acts will be
brought to account. From the
standpoint of an individual business,
however, the more constructive
approach will be to see the enhanced
responsibility as a trigger for greater
transparency and clarity in its trading
relations to ensure that war crimes are
in no way encouraged, even indirectly.
Prevention is always better than cure,
and especially so in this area. As the
message spreads out that there will be
no financial reward for pillage, so one
possible incentive for it is removed.
Powerful as public opinion may be,
corporations also face legal realities
and liabilities. Management will be
concerned with identifying the
mechanism by which any threat to the
business will operate, and what
concrete measures managers can take
to ensure that such threats are
managed at the most appropriate level.
Integral to this assessment will be the
evaluation of likely financial impacts,
direct and indirect, of association with,
prosecution for, or ultimately conviction
for pillage. Lost sales, lost contracts and
direct penalties will all play a part.
2. What is pillage?
Pillage is essentially the crime of theft in
the context of situations of armed
conflict. Its commission and
consequences are seen as so grave that
several countries have introduced a
‘universal jurisdiction’ to deal with it
– that is to say, such a country will
entertain charges against any person,
whether that country’s jurisdiction
might normally attach or not, regardless
of where in the world the acts have
taken place. Remote though
management may consider the risk of
such an action to be, the potential
consequences are so great that it must
be managed.
With the length of modern supply
chains and the potential extension of
the crime to cover corporate activities
as well as individual liability, the scope
for a business to find itself interacting
with individuals or entities that have
committed pillage is increased.
Although the International Criminal
Court (ICC) itself has no jurisdiction
over corporate bodies, being restricted
to prosecution of natural persons, most
national jurisdictions have some kind of
domestic mechanism for prosecuting
pillage, either by enforcing the ICC
statutes, incorporating the ICC offences
into their own jurisprudence, or
implementing national laws that either
replicate the ICC wording or outlaw
similar offences.
The war crime of pillage broadly covers
the removal without the owners’
consent of goods or resources during
an armed conflict. There need not be an
international element to the conflict.
The issue for multinationals is not so
much the actual, direct commission of
pillage, but the risk of being an
accomplice to the crime. Moreover, the
risk is wider than that of legal action in
the countries where the business
operates, given the point about
universal jurisdiction made above.
Thus the potential risk for a
multinational corporation (MNC) is that
the parent corporation will find itself on
the receiving end of an indictment for a
war crime in a country where it does not
operate, brought by persons with whom
it has had no contractual relations, in
respect of actions that it did not
instigate or control.
THE DEVELOPMENT OF PILLAGE
court. The second approach is to
create a domestic crime of pillage, by
reference to definitions within
international treaties. The third
approach is to create a domestic
offence based upon explicit definitions
within the domestic statute, although
these are in many cases based more or
less closely on existing international
definitions.
Whichever method is used to create the
offence, there are a number of features
common to the jurisprudence of the
crime across the world. For all practical
purposes, the crime of pillage will align
with the definition given in the ICC’s
Elements of Crimes, which incorporates
the following five factors.
The crime of pillage has been codified
since 1863, and is now a feature of
international court statutes and of most
domestic legal systems. Reflecting the
historic roots of the crime, some
international formulations of the crime
include reference to plunder, and to the
taking by force of towns or villages,
although more recent codifications
refer simply to ‘pillage’.
• The perpetrator appropriated
certain property.
It has been embedded in even the
earliest codifications, however, that
pillage need not occur directly in the
commission of acts of war: it can occur
after the initial military action.
• The conduct took place in the
context of and was associated with
an international or non-international
armed conflict.
The domestic reflections of these
international and treaty precedents take
one of three forms. The first variant is
cross-referencing the relevant
provisions of a treaty, and thus
effectively granting jurisdiction over the
international offence to the domestic
PILLAGE: A NEW THREAT TO GLOBAL SUPPLY CHAINS
• The perpetrator intended to deprive
the owner of the property and to
appropriate it for private or personal
use.
• The appropriation was without the
consent of the owner.
• The perpetrator was aware of the
factual circumstances that
established the existence of an
armed conflict.
Identification of the perpetrator is, of
course, key to the prosecution, and here
we have perhaps the key factor in the
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development of the law on pillage,
namely its application to bodies
corporate. There is by no means
universal academic support for the
proposition that liability for pillage can
be attributed to a body corporate. Yet
there are strong indications that the
concept of pillage is developing so as
to encompass this wider application.
most domestic formulations of the
crime instead refer to the limited list of
exemptions from liability afforded by
the Hague Regulations. These
exemptions operate to exclude
appropriations made out of military
necessity, in principle, from constituting
pillage, although the restrictions are in
practice very tightly drawn.
significant consequences for those
connected with the commission of the
offence, and for those attempting to
prosecute them. There is an obligation
at state level to investigate and
prosecute war crimes within the
jurisdiction of the international criminal
courts, which are exempt from any
statute of limitations.
In November 2013, TRIAL, a Swiss based
NGO, filed a complaint with the Swiss
authorities in respect of Argor-Heraeus
SA, alleging the company’s complicit
involvement in the processing of three
tonnes of pillaged gold from the
Democratic Republic of Congo (DRC).
The initial Swiss complaint related to
money laundering, but the evidence
relating to Argor, Hussar Services
Limited (a UK company) and Hussar
Limited (a Jersey company) has been
passed to the relevant prosecutorial
authorities in Jersey and the UK.
In any event, it seems unlikely that any
goods that would make their way into
the supply chain of an international
business could have been appropriated
directly for military use. Any military use
would typically consume any resources
or materials that might otherwise be
destined for the supply chain, so their
survival and incorporation into
international trade would be
incompatible with the ‘military
necessity’ exemption.
The formulation followed by the ICTY is
widely regarded as setting out the
current position: ‘[t]he armed conflict
need not have been causal to the
commission of the crime, but the
existence of an armed conflict must, at
a minimum, have played a substantial
part in the perpetrator’s ability to
commit it, his decision to commit it, the
manner in which it was committed or
the purpose for which it was
committed’.
Individual courts are increasingly
disregarding the ‘international or
non-international’ distinction in
establishing the ‘armed conflict’
requirement. The logic to this is clear,
since it is immaterial to the prosecution
whether the conflict was national or
international in nature; the crime and
the consequences remain the same.
This test is remarkably broad as applied
to the commercial activities of a
business operating in, or adjacent to, an
area where there is an armed conflict.
As a number of the convictions of
businesses after the Second World War
demonstrated, the company need not
be directly linked to the armed
combatants, and more recent
judgments have confirmed that the
crimes can still be committed even if
‘temporally and geographically remote
from the actual fighting’.
If the complaint against Argor is upheld
on grounds of pillage, there will be
considerable pressure for those more
directly involved in the sourcing of the
gold from the DRC to be prosecuted for
pillage in the UK and Jersey. A number
of commentators have set out clear
paths to a prosecution, in particular
Professor James Stewart, a former
prosecutor for the International Criminal
Tribunal for the former Yugoslavia
(ICTY), whose 2010 work Corporate War
Crimes: Prosecuting the Pillage of
Natural Resources sets out in detail the
basis for corporate liability for pillage.
In parallel with the debate over the
identity of perpetrators, there is some
debate about the continuing relevance,
and underlying meaning of, ‘for private
or personal use’. The difficulties here
have mostly been superseded, and
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As long as there is protracted armed
violence (which can mean as short a
timespan as 30 hours) between two (or
more) organised armed groups then the
condition of ‘armed conflict’ is satisfied.
Nonetheless, for the theft, money
laundering or similar offence to be
classified as ‘pillage’, rather than simply
falling under the existing domestic
criminal regime, there does have to be
a defining link, a nexus, with the armed
conflict. Establishing this precondition
of the war crime will have a number of
There is even a further judgment, from
the Netherlands, which suggests that
acts that ‘stimulate warfare’ can
constitute the war crime. In the context
of resource wars, demand for the
underlying resources undoubtedly
encourages the continuing violence –
although satisfying the legal burdens of
proof on this point may be another
matter.
3. The interaction of pillage with modern business practices
The potential impact of pillage on the
consumer electronics industry is well
documented, as the ‘3Ts’, tantalum,
tungsten and tin, are essential to the
manufacture of consumer electronics,
and significant factors in the various
conflicts afflicting the DRC. In practice,
there are risks for businesses far beyond
mineral extraction.
A key element of the initial case against
Charles Taylor, former president of
Liberia, related to illegal logging
activities carried out in Liberia. Garment
manufacturers must deal with the
complexities of the cotton supply chain,
and the capital-intensive nature of
production is already recognised as
producing a potential environment for
child labour abuses; introduction of a
link to warfare would doubtless prompt
the additional exploration of war
crimes. Coal, palm oil, even works of art
could potentially be tainted by pillage
and give rise to money-laundering
implications.
POTENTIAL OUTCOMES FOR
BUSINESS – PROSECUTION,
CONVICTION OR SIMPLY GUILTY BY
ASSOCIATION
The risks for MNCs even of association
with so emotive a crime as pillage are
clear. While the ICC declines jurisdiction
over corporates, business will at least
be spared the direct reputational
impact of association with a
prosecution before the main
international court.
Nonetheless, it seems clear that even a
domestic prosecution for pillage would
be deeply damaging in reputational
terms for any consumer-facing business,
while the public procurement impacts
of any criminal conviction are typically
far reaching. Even in the absence of
specific procurement rules it seems
unlikely that any public authority would
want to be associated with a contractor
convicted of a war crime.
consumers are imposing far higher
standards on their suppliers that might
previously have been the case. There is
a renewed interest in the wider impacts
of corporate behaviour.
There is a further consideration for
international actors subject to moneylaundering regulations, and that is the
extension of the group of ‘crimes
predicate’ to money laundering to
include the illicit trafficking in stolen
and other goods. Any person found to
have knowingly handled funds deriving
from this activity will be open to
prosecution for money-laundering
offences. While the public perception
of such activities may not be quite so
censorious as for ‘pillage’, the legal and
commercial impacts of a prosecution
for money laundering would be every
bit as significant.
The creation of the corporate vehicle as
a means for those with capital and
wealth to invest without the need to
manage, and the opportunity for those
with the skills to manage but not
necessarily the means to work with, has
made separate corporate personality
the key to growth. Alongside that
opportunity, however, comes a need for
accountability, and that finds part of its
most powerful expression in the
context of issues such as war crimes.
For all the fact that a corporate group
may be able to characterise a moneylaundering offence more as a technical
bookkeeping error than as the criminal
abuse and exploitation of the victims of
warfare, the more technical nature of
the offence renders a prosecution
correspondingly more likely. The
satisfaction of evidential burdens will be
easier, and the impact of a criminal
prosecution on a body with major
public procurement contracts will be
the same whether the wrongdoing is
pillage or money laundering.
The possibility of linkage with money
laundering vastly increases the risks
posed by the presence in an MNC’s
supply chain of pillaged goods.
In the aftermath of the global financial
crisis the role of business in society has
been subject to widespread scrutiny,
and it is increasingly clear that
PILLAGE: A NEW THREAT TO GLOBAL SUPPLY CHAINS
7
4. Risks to businesses
A business faced with a possible action
in relation to pillage will need to
consider a number of issues. Of the
likely impacts upon the business, the
marginal costs of an actual conviction
may, in fact, be one of the least
concerning aspects, and certainly in
terms of a ‘likelihood vs impact’
analysis. The likelihood of a successful
conviction might reasonably be
assessed at the outset as so small that
the overall risk weighting is minimal.
A business faced with an association
with pillage will face an immediate
reputational issue. A number of factors
will play into the analysis of reputational
impact, including the nature of the
customer base, the existence of
competitors and credible substitutes,
and the proximity of the allegations to
the business’s own activities.
The response of consumers to
allegations of war crimes is likely to be
of considerable concern to a board.
Businesses that have relied for market
position on a perception of ethical
behaviour will be particularly
susceptible to accusations relating to
war crimes, but it is increasingly the
case that consumers are demanding
higher standards from business
generally.
It may well be the case, given the
evidential difficulty of establishing
complicity to a level sufficient to sustain
a conviction for pillage, that legal action
would not run so far up the supply chain
as to affect final producers with a direct
consumer relationship. Nevertheless,
even for an exclusively ‘business to
business’ supplier, being cited in a war
crimes prosecution would still cause
significant economic damage.
8
Customers will have their own
reputations to consider and, where they
are subject to close consumer scrutiny,
they will wish to avoid the taint of
pillage.
The business may believe that it has
insufficient direct competitors for there
to be a likely impact – or perhaps that
consumers would simply regard all
competitors as similarly tainted,
accordingly defusing the impact of
association with commercial
exploitation of warfare. In the highly
brand conscious field of consumer
electronics, there will be a number of
factors influencing consumer choice,
and in some cases a perceived
superiority of underlying product, or
compatibility issues with other devices,
will initially have a greater influence on
consumer choice.
Nevertheless, there is a clear long-term
risk even for a currently dominant
market player, and it is perhaps notable
in this context that one of the first
electronics manufacturers to take
independent action to verify the
conflict-free status of elements of its
supply chain was Apple.
The proximity of the allegations to the
business’s own activities will be relevant
in two ways. Firstly, there is the
reputational risk of association, and the
fewer links in the chain between the
business and the crime, the greater the
risk that the public will identify the
business as complicit in the
wrongdoing. The greater the business’s
influence over the conduct of its
supply-chain partners, the greater the
perceived culpability of management
for their actions.
Perhaps more important from a risk
perspective, however, is the interaction
with the legal burden of proof in any
court action. The standards of
complicity sufficient to justify a criminal
prosecution are high, and the evidential
burden is likely to be significant. The
differing approaches of prosecutors in
different jurisdictions will, of course, be
relevant given the domestic nature of
actions.
While by no means universally adopted,
the imposition of criminal liability on
corporate bodies is increasingly
widespread, with moves even within
Germany to introduce corporate
criminal liability at a federal level.
Germany already operates a universal
jurisdiction approach to the prosecution
of war crimes, and while it is tempered
by a restriction to persons present
within Germany, for many major
multinational corporations the
‘presence’ test is likely to be satisfied.
For a business, subjection to the
inquisitorial German judicial process, as
opposed to, for example, the more
adversarial US process, might have
significantly different implications in
terms of the relative rights and
responsibilities of prosecutor and
defendant, and the impact that would
have on the timing and extent of
disclosures.
Once a prosecution is under way, the
business will be faced with a number of
further issues. The precise level of
disruption to normal business activities
in order to comply with the prosecutors’
information requests will vary
depending upon the jurisdiction, but
the gravity of the charges, the
complexity of modern business and the
high standard of proof required will all
combine to ensure that the volume of
evidence required is substantial. In
addition to the financial costs of
retaining legal representation, quite
possibly in a jurisdiction with which the
board might otherwise have thought
that the business had no connection,
the business will need to divert
resource to collating the materials
required to establish the relevant facts
HOW ACCOUNTANTS CAN HELP TO
SOLVE THE PROBLEM
Professional accountants can bring their
skills to bear in two ways – designing
control programmes and providing
assurance on them. The skills and
processes relevant to the two aspects
of dealing with the risks posed by long
supply chains are complementary.
Where better alternatives exist, the
imposition of mandatory regulation is
not in principle advocated by ACCA.
Equally, there is a risk inherent in any
voluntary transparency regime that
those who will implement it are those
who do not need to, while those
businesses that society would most
want to implement such transparency
regimes will be those that choose to
ignore them. Reliance upon the
enlightened self-interest of business
depends firstly upon the disclosures
being in the interests of the business,
and then upon the business’s
recognition of this fact.
The EU has proposed regulations on
transparency and reporting (Directive
2013/34/EU, the Non-Financial
Reporting Directive) which would
impose supply chain due diligence on
all entities with a balance sheet greater
than €20 million, or turnover in excess of
€40 million. In proposed recitals to the
Directive, the Commission noted: ‘The
supply chain of an undertaking can
become disconnected from source and
liability and can therefore pose
significant risks not only to the
undertakings themselves, but also to
the wider society as a result of their
business operations. It is therefore
important that undertakings perform
due diligence on their supply chains,
including where they use subcontractors and that these particular
policies are disclosed in order to
mitigate such risks and inform
stakeholders of the assessments they
have undertaken.’
There are a number of possible models
for presentation of the information
related to these areas, and the EU has
suggestions for which should be used:
‘In providing this information,
undertakings should rely on national
frameworks, EU-based frameworks such
as the Eco-Management and Audit
Scheme (EMAS), and international
frameworks such as the United Nations
(UN) Global Compact, the Guiding
Principles on Business and Human
Rights implementing the UN “Protect,
Respect and Remedy” Framework, the
Organisation for Economic Cooperation and Development (OECD)
Guidelines for Multinational Enterprises,
the International Organisation for
Standardisation (ISO) 26000, the
International Labour Organization (ILO)
Tripartite Declaration of principles
concerning multinational enterprises
and social policy, and the Global
Reporting Initiative. In the case of
information provided relating to social
and employee matters and human
rights, the United Nations Guiding
PILLAGE: A NEW THREAT TO GLOBAL SUPPLY CHAINS
Principles on Business and Human
Rights and the OECD Guidelines for
Multinational Enterprises should be
considered the basic set of guidelines.
Similarly, in the case of Environmental,
Corruption and Bribery matters, the
(UN) Global Compact should be
considered the basic set of guidelines.’
SUPPLY-CHAIN SPECIFIC
REGULATION
More directly, the US has enacted, and
the EU has proposed, regulations
directly relating to conflict minerals in
the supply chain. The US rules (Section
1502 of the Dodd–Frank Wall Street
Reform and Consumer Protection Act)
impose significant mandatory recordkeeping and disclosure requirements
on US listed corporations by reference
specifically to one conflict zone, the
DRC, whereas the EU proposals
(Proposal for a Regulation 2014/0059
COD) allow for voluntary adoption of
disclosure by importers of tin, tungsten,
tantalum and gold into the EU, whatever
the minerals’ origins.
Each approach has its supporters and
detractors, with the US approach often
characterised over unduly burdensome
on business, and the EU proposals
ineffectual. Certainly it could be
suggested that it is the side effects of
the US system that are its weakness,
with the opposite being the case for the
EU proposals.
The 2010 Dodd–Frank Reform Act (US)
requires companies using tin, tungsten,
tantalum or gold to document their
supply chain and report to the
Securities and Exchange Commission.
Companies must prove that they have
taken reasonable precautions to avoid
9
using consignments of these four
minerals that have originated in the
DRC and surrounding countries. The EU
proposals are broader based, and
involve the positive assertion by
participating suppliers that their
products are verifiably sourced from
responsible sources (whether in the
DRC or elsewhere). The majority of
larger enterprises involved in relevant
trades are engaged with the anticonflict mineral partnership of the
Electronic Industry Citizenship Coalition
(EICC) and the Global e-Sustainability
Initiative (GeSI), which have established
two tools that companies can use to
check the conflict-free status of their
supply chains.
The CFSI (conflict-free sourcing
initiative) programme focuses upon the
smelters and refiners that are a key
pinch point in the supply chain,
especially for tungsten and tantalum.
The programme is voluntary, and firms
are evaluated on the steps they take to
avoid purchasing and/or processing
conflict minerals.
The Conflict Minerals Reporting
Template documents information
related to the minerals that suppliers
use, the products they create, and the
smelters from which they source.
Completion of the template allows
manufacturers to build up a
comprehensive picture of the firms from
which they source.
In addition to the knock-on effects up
and down commercial supply chains,
there are indications that the EU might
integrate compliance with its
regulations into the official EU
procurement processes, effectively
forcing major manufacturers to
10
implement the due diligence
mechanisms. Notwithstanding the
nominally voluntary nature of the EU
proposals, there is still a distinct
likelihood that the processes and
mechanisms required to implement
them will become the default option for
increasing numbers of businesses.
The natural prudence of parties (or
perhaps more likely that of their
lawyers) towards mergers, takeovers
and acquisitions is likely to see
increasing numbers of businesses
warranting that they are compliant with
the relevant regulations simply as a
consequence of the due diligence
operations surrounding transactional
activities.
It has been noted in a similar fashion
that warranties of compliance with the
UK Bribery Act have become a part of
standard business sale precedents in
the UK, and as a result many businesses
that might otherwise have believed
themselves to be outside the scope of
detailed regulation have implemented
the relevant controls and processes.
Given the potential downsides of failure
to comply, widespread compliance with
the regulation out of enlightened
self-interest seems likely in time.
Yet to what extent will compliance with
such provisions constitute a defence
specifically against pillage? The answer
will depend on the facts of the case, but
it is worth remembering that the simple
act of disclosing in accordance with
standards and then receiving a
favourable auditor’s report will not
necessarily protect a company, or its
managers, from accusations of financial
crimes.
The contribution of the auditor is defined
by the scope of the role. The viability of
conducting full-scale supply chain due
diligence on every aspect of the
production process of, for example, a
modern microwave oven, at every stage
in that process where a supplier satisfies
the turnover or balance sheet
requirements, would clearly represent a
massive duplication of administrative
effort on the part of suppliers and
vendors.
On the other hand, if manufacturers
were simply to seek assurance from
their suppliers that the latter had
undertaken full due diligence, would
this constitute a full defence? It seems
unlikely that this would necessarily
protect the final manufacturer in the
chain from prosecution for pillage if a
blind eye had deliberately been turned,
and given the subjective nature of
proving such an offence, the reliance
that end-users might be prepared to
place on such assurance seems likely to
be compromised, putting us back into
the position where management is
exposed to the risk of accusations of
pillage.
What are the defences, and how can
accountants ensure that these are
available?
While the two main areas of defence for
a business will relate to the knowledge
of circumstances and intention to
commit pillage, a ‘win’ based on
ignorance of their own supply chains is
unlikely to be satisfactory for most
MNCs. In addition to involvement in
highly emotive criminal conduct, they
will in addition have been shown not to
have fully understood their own supply
chains, albeit not to a criminally
irresponsible level.
The only fully satisfactory outcome for a
business will be to demonstrate that it
has no involvement in pillage, whether
intentional or otherwise. The reporting
regimes proposed around the world all
rely upon detailed knowledge not only
of the business’s own activities, but of
its relationships with others and their
activities.
The administrative burden of
maintaining, for example, a consistent
paper trail of accountability at every
stage in the production process in
respect of every individual shipment of
materials is, however, unlikely to be an
attractive prospect. The levels of due
diligence required at each stage of the
production cycle will vary according to
the perceived risk, and the resources
available to the business. It should be
noted that lack of resource to confirm
the status of goods will not in itself
constitute a defence.
Business may need to give
consideration to finding proxies for
direct assurance. For example,
suppliers’ membership of recognised
trade bodies or submission to certain
levels of audit will demonstrate a
commitment to good practice. Whether
this can be judged adequate will involve
a considered appraisal of the
circumstances, a process ideally suited
to the skills of the modern accountant.
Notwithstanding the abhorrent nature
of the underlying crimes, a business
must, in managing its risk, maintain a
focus on the economic realities of
staying in business. If the costs of
effective supply chain assurance
become too great then competition
from less scrupulous competitors may
well render the best efforts of a
responsible business counterproductive
as its goods are priced out of the
market.
PILLAGE: A NEW THREAT TO GLOBAL SUPPLY CHAINS
11
5. Conclusion
The war crime of pillage lay dormant for
decades after the Second World War,
revived only for the most dreadful
atrocities identified on the African
continent. Now, a confluence of shifting
legal interpretations, heightened social
awareness and globalisation of trade
has raised the possibility of corporate
prosecutions, not just for the direct
commission of the offence but also for
involvement in the laundering of
pillaged materials.
The development of a credible
litigation risk which could destroy the
businesses and careers of those
involved in pillage will be a major step
along the road to a more just society.
The implementation of proportionate
and effective controls to stem the flow
of illicit goods while supporting trade
networks that ensure continued trade
with those areas most affected by
resource wars is supported by ACCA as
one of the most beneficial steps that
big business can take to improve its
relationship with society.
Businesses have reaped the rewards of
a global resource pool. The time has
come to acknowledge responsibility for
the externalities of multinational supply
chains, not just in terms of accounting
disclosures, but in concrete actions to
recognise and reinforce the role that
business should play in society.
12
Appendix: a case study of compromised good intentions
A concrete example of regulatory
imposition of supply chain assurance is
the conflict-minerals provisions of the
Dodd–Frank Act applying to US listed
manufacturers and distributors of
consumer electronics devices. The aims
of the provisions are laudable: to
reduce the incentives for abusive
artisanal mining in the Democratic
Republic of Congo (formerly Zaire) for
coltan, wolframite, cassiterite and gold
ore, which are the base materials for
tantalum, tungsten, tin and gold
respectively. All four materials are or
have been significant in the production
of consumer electronics devices,
specifically capacitors.
A number of shortcomings with the
assurance regime have been identified.
Perhaps most fundamentally, the
disclosures are imposed at the US
manufacturing/assembly stage of the
process, and will affect an estimated
6,300 businesses. Each of those
businesses will be required to
investigate its suppliers and seek the
relevant assurances that these suppliers
are compliant with the requirements of
the Act.
sources of the minerals, there are
comparatively few plants worldwide
with the capacity to process the raw
materials and produce metals of the
required quality for consumer
electronics; the worldwide total of
smelting plants has been put at around
500. A focus on this pinch point in the
supply chain reveals a potentially
effective and efficient monitoring
process for identifying the source of any
particular batch of the relevant metals
at the point where it enters the wider
supply chain.
As part of the smelting process, a
refinery analyses each batch of ore on
receipt, profiling the precise
proportions of elements present. The
purpose is twofold, firstly ensuring that
amounts of, toxic substances such as
radioactive materials are at an
acceptably low level (so as to avoid
poisoning both the plant and its
workers) and secondly to ensure that
the ore is subjected to the appropriate
processes to extract all the materials
present (for economic efficiency).
Estimates of the cost of compliance
have been estimated at between $40
million and $4 billion. Applying
certification this far down the supply
chain, and on the basis of contractual
assurances creates a potentially lengthy
chain of trust-based pronouncements.
The precise make up of ores varies from
one mine to another, allowing the
source of any particular batch to be
‘fingerprinted’ with a remarkable
degree of accuracy. Batches emanating
from the conflict zone can be identified
at this stage, and further assurance
sought that no laws were broken in
extraction of the ores.
As an alternative to this process, the
disclosures in respect of tantalite and
wolframite, in particular, could be
imposed at the smelting stage. While
there are a significant number of
Materials sourced from elsewhere will
de facto be exempt from the strictly
geographically defined provision of the
Dodd–Frank Act. A certification process
allowing the refinery to confirm that its
PILLAGE: A NEW THREAT TO GLOBAL SUPPLY CHAINS
output was not mined in the DRC
should then be acceptable onwards
through the supply chain. Availability of
a certificate of origin from the smelting
plant in respect of the materials present
in each a particular batch of
components should then meet the aim
of assuring the acceptability of those
items.
It is notable in this context that both
Intel and Apple have followed the route
of smelter certification to reassure
stakeholders that their products are to
at least some extent ‘conflict-mineral
free’. Assurance of this nature has many
benefits; it is subject to objectively
verifiable criteria, and it builds upon
existing economic processes and
management measures.
13
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